(Adds reaction) LONDON, Sept 9 (Reuters) - Britain's economy picked up more than expected in July, data showed on Monday, dampening fears that it will succumb to its first recession since the financial crisis as the Brexit crisis escalates. Economic output in July alone was 0.3% higher than in June, the Office for National Statistics (ONS) said, marking the biggest rise since January and topping all forecasts in a Reuters poll of economists that had pointed to a 0.1% increase. The pound inched higher against the dollar on the figures, which showed the expansion was driven by the dominant services sector -- although the ONS said the underlying picture showed its growth weakening through 2019. "While the figures are far from stellar, after a contraction in the second quarter the chances that we see a negative GDP print in the third have now dropped significantly, meaning that a technical recession will likely be avoided," said David Cheetham, chief market analyst at online broker XTB. The world's fifth-biggest economy shrank in the second quarter, a hangover from a stockpiling boom in advance of the original March Brexit deadline. While most economists think modest growth will return in the current quarter, a slew of downbeat surveys has shown business activity wilting during the Brexit crisis, especially in August. They point to a risk that the economy will contract again, which would officially herald a recession. The ONS said gross domestic product in the three months to July was flat compared with the previous three-month period. A Reuters poll of economists had pointed to a 0.1% contraction.

TRADE TENSIONS Last month, the Bank of England forecast that economic output would grow 0.3% in the third quarter, although its forecast for zero growth in the second quarter proved to be too optimistic. Besides the political crisis at home, the outlook for the economy has dimmed further because of trade tensions between the United States and China. Wednesday's data showed the services sector, which accounts for almost 80% of British economic output, expanded 0.3% in July after four months of stagnation, the biggest upturn since November 2018. Manufacturing output increased unexpectedly last month, rising 0.3% in monthly terms, while the construction industry also fared better than expected, posting a 0.5% rise in output. Separate figures showed the goods trade deficit increased in July to 9.144 billion pounds from 8.920 billion pounds in June, although this was still a little less than the 9.55 billion pounds deficit economists had forecast.